In the recent past a number of non-financial institution technology firms have bypassed banks by launching independent, Internet-based person-to-person (P2P) payment mechanisms. Most such services require consumers to register and debit a credit card or bank account before sending a payment. Recipients of payments receive email notifications with a specially coded link to register and authenticate before receiving several payment options, such as depositing into a bank or credit card account.
Due to consumer demand and the “viral” nature of these mechanisms (by compelling recipients to register in order to collect payments), uptake has been significant. Consumers want a convenient Internet mechanism to pay for online purchases and to replace “one-off” checks and cash payments, both domestically and internationally. For example, consider the millions of consumers who regularly wire money to family members that live abroad. For traditional financial institutions, the advent of P2P payments represents both a threat and an opportunity. Banks risk losing customer relationships to third-parties that will quickly try to expand their offerings into other traditional banking functions, competing with online checking accounts, business accounts and merchant payment services.
With non-bank start-ups acquiring P2P market share, banks risk never recouping their massive investments in online infrastructure. Once a non-bank has entered the P2P payment transfer market, there is an opportunity to go beyond free P2P payments and offer consumers a fill range of financial services, such as interest bearing sweep accounts, low-fee mutual funds and business accounts equipped to accept merchant payment.
Unlike other pure-play Internet banks, which have spent millions of dollars on advertising to promote their brands, non-bank P2P payment transfer firms have employed P2P payments to drive the initial adoption of their service and, in the process, have significantly reduced the average customer acquisition cost. Once a non-bank P2P provider makes inroads into a bank's customer relationships, it becomes easier to gain further ground. As a result, financial institutions face the danger of disintermediation by aggressive non-bank up-starts. Demand for such services has been so high that some banks are offering P2P payments to position themselves against third-parties and to acquire online customers. They include portals designed to aggressively capture new clients.
Competition with on-line banking services is arising from other payment providers in other forms as well, such as auction payments, online gift certificates, event, micropayments and stored-value, payment processing, global payments and specialty consumer payments. Most of these P2P payment services are positioned to operate outside of the traditional financial system. As such, consumers are forced to use third-party P2P services requiring personal financial information. This raises a number of privacy and security concerns. Moreover, poor performance by a non-bank third party (which is typically not regulated to the extent that banks and other financial institutions are) can undermine consumers' perception of the reliability of on-line financial service transactions generally.
Furthermore, consumers are suffering from password fatigue, and many are looking to simplify the manner in which day to day transactions and activities are conducted. Consumers look to their banks, which have already established the requisite credibility in financial dealings, to offer additional services from their core banking relationship.